Last night Microsoft announced that it had changed some of its policies around its forthcoming Xbox One game console that had generated considerable ire in the game console community. Most notably, Microsoft eliminated the requirement that the console be always connected to the Internet. That requirement and other “features” had created great fear in the gaming community that Microsoft was going to quash the secondary market for its console games, requiring users to buy new games and prohibiting them from sharing their games among friends. I won’t get into the details of what they announced and what changed here — you can Google that — but it’s shocking that Microsoft could get something so terribly wrong that they had to reverse course in less than a week. Let’s examine possible scenarios:

Microsoft could have really believed this was a good move. We’re moving towards an always-on environment and Microsoft is not alone in that belief. Just the other week Adobe announced that it would no longer sell packaged versions of its Creative Suite, selling it only by subscription online. If this is the case, Microsoft somehow managed to miss a few things. First off, the use profile of a game console is different than the use profile of a high-end business-oriented software suite. Adobe’s move in no way was a watershed moment. It was an early move but this vision is not yet universal and so Microsoft’s forcing it early was not well received. Moreover, if this was their goal, their value proposition for it was, shall we say, lacking. “Hey, in an always on environment we can deliver you all these neat capabilities. The first ones require you to use our heretofore optional paid online service and we’re also going to regulate if not eliminate your ability to share and sell games but hey, this is the future.”

Microsoft was trumped by Sony. After Microsoft’s announcement, Sony announced details around their PS4. PS4 is $100 cheaper and had none of those draconian features that Microsoft proposed. If Microsoft thought Sony was going to follow their lead, they were badly wrong. Sony not only offered a solution that had none of Microsoft’s downsides, it did so at a price point $100 cheaper. Sony not only didn’t follow Microsoft’s lead, they quickly parodied Microsoft‘s sharing restrictions. My son observed that “13 million views had to sting.”

Microsoft thought people would like this. I’m sure they’ve got all sorts of focus group research that said “we really like your direction.” Maybe they tasked their PR agency with “do a survey with people who will find this strategy palatable.” The sample size was perhaps 17.

Microsoft was planing a “new Coke” scenario. I know this one is really cynical but maybe Microsoft anticipated the reaction and this was done on purpose. This is a strategy Facebook has used in the past. Announce something so over the top that the market reaction will be negative. You can then backpedal, saying “we’ve listened to the voice of the customer.” In this scenario, you assume customers are going to balk on any changes so you purposefully announce something over the top so that when you back up, you’re still ahead of where you were before you made the announcement. I’d consider this a plausible scenario except for the back that Microsoft basically backpedaled to where they were before they made the ill-founded announcement.

You might say “no harm, no foul.” Microsoft backpedaled fast enough that by the time the consoles come on the market, closer to the holiday season, this will all be forgotten. I believe, however, Microsoft has done itself some permanent damage here. If you read your license agreements (and I suggest you do…if you suffer from insomnia”, Microsoft (and typically all vendors) reserve the rights to make unilateral changes in their licensing terms. Bottom line, Microsoft has always had the ability to impose these changes on their users, even post-sale. Nobody worries about these things here because they always think “Microsoft wouldn’t be so stupid as to do something that would slaughter their value proposition.” Well, now you’re thinking “maybe they would.” Sure, they backed off when it became clear they were getting slaughtered but do you think Microsoft has abandoned the approach or merely postponed driving it into their customers? Losing trust in your vendor is a very dangerous position and Microsoft may just have crossed that line. Maybe by beckpedaling they’ve closed ranks with their user base. But I don’t think so. This one will be fun to watch.

Two weeks ago, I blogged that Apple was picking fights (then Sony) that it had no business picking. The latest go-round now is with big publishers over how to sell subscriptions on the iPad and iPhone. Naturally, Apple wants to dictate terms and extract its 30%. Whereas bullying the music industry was pretty easy and, one could argue, justified, with these content producers, its a tougher argument and a tougher settlement.

In music, you could credibly argue that Apple made the digital music industry. Before Apple came along, things were fractured, to say the least. Apple unified a market, created a great experience, strong-armed the labels…and deserves to share in the fruits of its success. With books, newspapers and magazines, it’s a different case.

These players had well-honed approaches and strategies before Apple came on the scene.

These players are much better politically-connected than the music people who, ultimately, are small and don’t influence politicians very much. Magazines and newspapers: bigger and, oh yeah, that political clout.

Not surprisingly, therefore, the Justice Department and the FTC are said to be looking into Apple’s business practices. Wow. That didn’t take long. Apple announces something on Tuesday, on Wednesday Google launches a competitive offering (taking only 10%) and on Thursday there are rumors of government involvement. If that didn’t tell you Apple picked the wrong fight this time.

We’ve seen what government intervention did to IBM, AT&T and Microsoft over the years. We’re seeing Google’s challenges now. Welcome to the party, Apple. I reiterate my position that two weeks ago could have been Apple’s zenith.

I’m a big admirer of Apple. They design incredible products. They innovate and, beyond innovation, they create new categories and approaches. They have been richly rewarded for that and are now the second highest valued company in the world, behind ExxonMobil. You know there’s a “but” coming. And it’s a big one. Is it good for anyone (other than Apple) — even you — when they put their hand so deep in everyone’s pocket and when they tell you and me how to do business? (Full disclaimer: I don’t own any Apple products. I have a Sansa MP3 player, because I like the Rhapsody subscription music model. I actually like the Microsoft Zune subscription model even better, because then I get to rent and own music, but that’s maybe my next device consideration. I have an Android-based Motorola Droid, largely because I’m on Verizon and won’t buy any electronic device without a replaceable battery, so no, I’m not getting on line for a Verizon iPhone. I do, however, own some really old Macs and an original, and still working Newton. And my introduction to the technology industry in 1979 was on an Apple II+. But I digress…)

The latest flap is over Sony’s e-reader application where Sony wants to enable users to buy books without paying Apple its 30% “tax.” Apple, however, is insisting that all purchases must be made “in-app”…and as such, Apple wants to take its share of the transaction.

So, let’s get this straight. Apple owns complete control over whether your application makes it into the app store and if they say no, there’s basically no “legitimate” way for you to get an application on to your phone. With Android, while the default is to only allow apps to come in through the Android market, a simple uncheck in settings allows you to install applications from any source. Apple will tell you that’s to protect the user experience. That’s the same argument the telcos used to exclude devices from their network until, paradoxically, the iPhone came along and led to a new OS-centric model of wireless carriers here in the States and opened up the market to innovation that had been stalled for a decade. In other words, bullsh**, Apple.

But that’s not enough for Apple. Once the app has been approved, they want their full share of any revenue generated and won’t allow solutions that circumvent their taxing mechanism, regardless of how consumer-friendly and/or app provider-friendly those solutions are. If you want to make money on the iPhone, pay us our 30%. (This one will get really interesting the first time Oracle and SAP get serious about mobile apps. Clash of the Titans anyone? But it probably won’t get to that. Read on.)

If this were any vendor other than Apple, the hue and cry would be so incredibly loud that it would drown out conversation about American Idol. But Apple, our little darling, gets away scot-free. Imagine if Microsoft said “any transaction that occurs on a Windows machine will henceforth and forever more involve a payment to Microsoft.” The antitrust lawyers would move so fast that time would actually go backwards. But Apple?

Actually, I think this time Apple made a mistake. A big mistake. This one is so outrageously wrong that it’s sure to draw scrutiny from all corners. This could be the proverbial straw that broke the camel’s back. Apple probably thought “well, it’s only Sony. Who cares about them any more.” The real target, of course, is Amazon whose Kindle software is available on all platforms (imagine that, not just iPhone and iPad) and whose sales enrich Amazon’s coffers. Amazon is a threat to Apple’s control of the ecosystem. If Kindle is the standard for some forms of digital content, how can Apple own the whole process they way they do with music and, increasingly, video? If someone is able to stand up to Apple and not pay their ransom, what does that mean for all the others who feel they are being held captive?

So Apple started with Sony. A trial balloon if you will. This, however, could instead become Apple’s trial by fire. What Apple’s trying to do here makes Google’s and Facebook’s privacy intrusions seem like a walk in the park. Quite simply, Apple is trying to put a meter on the flow of digital content over the Internet. I’m loathe to draw comparisons to what’s going on in Egypt this week. Clearly, that’s a real-life saga that dwarves anything we’re talking about here. However, it’s hard to ignore the parallels. Enough is enough. Whether it’s a military dictatorship or a technological one, at some point the citizenry/customers say this has gone on too long and we need to push back.

While I’m not of course predicting such a dire outcome, this could some day be remembered as Apple’s Waterloo. They’re inviting legislative scrutiny in the United States and around the world. They’re forcing their “partners” to stand up and revolt. And most dangerous of all, they’re risking the love and support of their fan base. If there’s a coordinated effort on the part of content creators across all media types (books, music, video and, with today’s announcement of The Daily, news and information) — heck, even without a coordinated effort — the risk to Apple’s reputation, position (and market cap) is considerable.

Apple is restricting choice, controlling innovation and enriching its coffers. And it’s not benefiting you. Enough is finally enough.

I do believe that this week may well have been the Zenith of Apple’s power. And that’s pretty remarkable to contemplate. Pride goeth before the fall.